08TBILISI1420, PM GURGENIDZE URGES SENATOR BIDEN TO SUPPORT

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UNCLAS SECTION 01 OF 02 TBILISI 001420
SENSITIVE
SIPDIS
STATE FOR EUR/CARC, EUR/ACE, EEB/IFD/OMA AND E - U/S JEFFERY
TREASURY FOR OIA
E.O. 12958: N/A
TAGS: ECONPRELGG
SUBJECT: PM GURGENIDZE URGES SENATOR BIDEN TO SUPPORT
ECONOMIC HELP FOR GEORGIA
REF: TBILISI 1367
¶1. (SBU) Summary: In an August 17 meeting with U.S. Senator
Joseph Biden, Georgian Prime Minister Lado Gurgenidze
outlined the economic cost of the Russian invasion of his
country. He stressed the importance of continued existence
of the reform-minded government of Georgia to continuing U.S.
influence in Azerbaijan and Central Asia. Georgia is
experiencing a serious decline in the flow of investment to
offset its significant current account deficit. Without
international assistance, Georgia will have a serious
economic crisis and social and political unrest that will
threaten the GOG. Georgia needs an emergency IMF program
funded at up to 300 percent of its quota. Additionally,
Gurgenidze asked Biden and the USG to create an
internationally supervised, locally-managed fund for
reconstruction of the billion dollars in damage caused by
Russian troops. In the PM's view, U.S. leadership in
creating a fund, ideally with USD 1 billion in capital, is
essential to securing other needed donations by European
nations and the international financial institutions. End
Summary.
GEORGIA'S FAILURE A THREAT TO U.S. INTERESTS IN THE REGION
--------------------------------------------- -------------
¶2. (SBU) Biden told Gurgenidze that if the Russian invasion
of Georgia is allowed to stand, it will mean that the last 18
years of progress toward a secure, democratic Europe has been
wasted. Biden said he has heard from many world leaders who
are concerned and who agree with him that Russia must pay a
price for its actions. Gurgenidze agreed, and noted that
Russia's acts threaten the process of change in Azerbaijan
and the Central Asian countries. If the Georgian government
falls, he said, Azerbaijan will re-enter the Russian orbit
and there will be no chance of competing for influence in
Turkmenistan. Already, Gurgenidze said, Kazakhstan has gone
cold to Georgia and politicians in Ukraine, including
Tymoshenko, are beginning to distance themselves with calls
for neutrality. The Russians should leave Georgia as soon as
possible. Biden said that a strong and solid response from
the Europeans is needed, and simply likening the Russian
occupation to Munich is not enough.
GEORGIA'S SUCCESS BEFORE THE INVASION...
----------------------------------------
¶3. (SBU) Gurgenidze told Biden that before the Russian
attack, Georgia was expecting a 2008 GDP of USD 13.5 billion,
up from USD 10 billion in 2007. At the same time, because of
growth that stimulates imports of both capital equipment and
domestic consumption, Georgia's current account deficit was
20 percent of GDP. Such a large gap was sustainable,
Gurgenidze said, so long as it was offset by inflows of
foreign investment. Georgia has been receiving not only
direct investment but also an unusually large amount of
portfolio investment by private equity firms, amounting to 22
percent of GDP altogether. This was because Georgia is "a
shining light" and a "textbook case" of liberal economic
reform that makes it a darling of the investment community.
Gurgenidze has been predicting that Georgia would have caught
up with the poorest EU country, Bulgaria, within a mere three
years. Russia's attack has destroyed investor confidence and
the outlook is for no such income at all during the rest of
¶2008. Russia's intentions are to destabilize the Georgian
government economically and replace it with a weak, unstable
and subservient regime such as exists in Moldova, he said.
AND URGENT NEEDS AFTER IT
-------------------------
¶4. (SBU) Gurgenidze, a former banker, told Biden that
Georgian banks have held up well after the Russian attack.
They lost 12 percent of deposits in the first few days.
However, he said, the National Bank of Georgia (NBG) expended
11 percent of its reserves to preserve liquidity and keep the
exchange rate stable. Gurgenidze predicts that even if there
are no more shocks, foreign currency reserves will erode
another 3-4 percent over the next week, and will be
sufficient to cover only half of the usual three months of
imports. Such losses simply cannot be sustained, he said.
¶5. (SBU) Gurgenidze said the GOG would like for the IMF to
offer it a program funded at 300 percent of Georgia's quota
in order to keep the banking system stable. An emergency
mission is coming to Georgia soon from the IMF to assess the
situation. Gurgenidze hopes that the facility will never
have to be used. But without confidence building measures,
TBILISI 00001420 002 OF 002
he estimates that only USD 500 million in investment will
come to Georgia in 2009. If that happens, and no other help
is received, Russia's objective of regime change will likely
be accomplished by the ensuing social and political
discontent.
¶6. (SBU) Besides the
IMF program, Gurgenidze is thinking of
direct contributions to a reconstruction fund composed of
U.S., European and international financial institution money,
which would be internationally supervised and locally managed
in Georgia. He hopes that the U.S. will contribute as much
as USD 1 billion, and that other donors could be persuaded to
match that amount. He says an "attention getting number",
one billion dollars, is needed, and that sum matches the
extent of the damage to private and public infrastructure.
The highway system has suffered as much as USD 300 million in
damage. A concerted effort to privatize and develop
hydropower assets, which could have produced USD 1.5 billion
a year in exports of power, is stymied. Plans to privatize
the 49 percent of Poti port still in government hands are
useless. Government revenues will decline by 30 percent,
according to Gurgenidze, and the exchange rate could slip
from 1.4 lari to the dollar to 1.7. The government's
borrowing power for private capital will be far less than
before.
¶7. (SBU) U.S. leadership in setting up the fund and
persuading European governments to help is essential,
Gurgenidze said. Senator Biden concluded by noting that
people in the United States are concerned about the new, ugly
face that Russia has presented to the world through its
invasion of Georgia.
¶8. (U) Senator Biden's office has cleared this message.
TEFFT

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